How Poor People Can Make Economic Progress- 2004 sridhar vembu’s blog

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Sep 2, 2018 · 4 min read

Sridhar Vembu said in year 2004 in blog “How Poor People Can Make Economic Progress”

Capital which is very fundamental to
understanding “capitalism”. Capital is just another term for
“accumulated savings, stored in the form of money or other items of
value”. Note the “or other items of value” — so it is possible for
someone to have a lot of “capital”, yet have very little “money” — for
example someone who owns a lot of land. Capital stored in the form of
money or things that are easily converted to money, such as Gold, is
called “liquid capital”, while capital stored in the form of things
that are harder to convert to money, such as land, is called “illiquid
capital”.

The entire economic progress of human race came essentially from the
accumulation of capital, over decades and centuries. Think for a moment
a homeless man living in the streets of Chennai. How can he improve his
life? There is one way: if he is able to go perform some labor, and
spend a little less than he makes every day; he can very slowly
accumulate 10 rupee here, a 50 rupees there. When he gets to only a few
hundred rupees, he can visit the wholesale vegetable/fruit market in
the morning, buy some easy to sell items, and sell them on door to
door. This activity will yield even larger savings over time, and so he
then accumulates a few thousand rupees. He can now buy some “fixed
asset” such as mobile laundry or a fruit cart, and set himself up on a
busy street corner. He is well on his way to being a
“capitalist”. Where life will take him is now entirely up to his
initiative, energy and intelligence. If he were to keep his eyes and
ears open, and just listen to the ebb and flow of the marketplace, he
will start a small dhaba, a fruit juice bar, and so on.

Do you think people the above scenario is far fetched? Think again -
the only reason this did not happen in India (but happened in Hong
Kong, Taiwan, Singapore, Korea and so on, in just the last few decades)
is because socialism in India strangulated most markets for goods and
services and prevented most people from transacting business. As usual,
the poorest people paid the biggest price, because it kept the market
for the poor people’s goods and services from growing. After all, in
the above example, if this poor homeless man were to be in a poor
village in Dharmapuri district, there is just no way he can use the
“boostrapping technique” described above, because there is no market
for his services. Unfortunately, during the era of socialism, all of
India was fast becoming Dharmapuri.

The existence of a prosperous middle class, even a small one, coupled
with a free economic system, implies that a vibrant market for poor
people’ services and goods emerges quickly. This market enables the
ambitious poor to accumulate capital, and move up the value chain. This
is not theory — it has been observed again and again wherever economic
freedom prevailed, and it is even true in India in the big cities.
Ironically, the poor people of Dharmapuri today have the option of
going to Bangalore to do construction work (in the booming construction
industry of Bangalore). So it is not just software engineers benefiting
from economic freedom.

So what about illiteracy? In fact, even today, the average Hong Konger
is not that much more literate than the average Chennaiite (I didn’t
say “average Indian”, but “average Chennaiite” with a reason — cities
always have higher literacy levels, and Hong Kong is a big city). Yet,
Hong Kongers enjoy an average annual income of about $20,000 per
person, and in Chennai, we are at the level of about $700 per person.
The difference has almost nothing to do with literacy, but almost
entirely to do with the absence of economic freedom in the past in
India (and even now, India is only partially free, not as free as Hong
Kong).

So is education overrated? Not at all. The existing pool of
well-educated citizens of Chennai are sufficient to spark economic
progress, and the rest of society can use them to “bootstrap itself”.
There are enough educated citizens in Chennai, so there is no bootstrap
problem. In fact, the IT industry, with perhaps 100–200,000 well paid
jobs in Chennai, is a very good starting point for large scale economic
progress. In Hong Kong, textile industry and toys played the bootstrap
role, but it really doesn’t matter how you start the process.

This is why I am so optimistic. The only way to derail this process is
for government to reimpose socialism or screw up in other ways (incite
widespread communal riots, for example). Government should stick to
just doing its job: protecting the life and liberty of citizens, and
maintaining law and order. It should simply get out of every other
activity, and let free citizens run their own economic affairs as they
see fit”

- Sridhar Vembu

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